Genasys Inc (GNSS) 2011 Q1 法說會逐字稿

Welcome to LRAD Corporation's fiscal Q1 2011 conference call. I'm Robert Putnam, Investor Relations for the Company. Kathy McDermott, our Chief Financial Officer, and Tom Brown, our Chairman, CEO and President, are also on today's call. Ms. McDermott will recap our fiscal Q1 2011 financial results followed by a brief presentation from Mr. Brown. After his remarks we will open the call to questions.

Before we begin please note that can that, other than statements as to historical facts, statements made on this conference call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are based on current expectations.

Words such as expects, anticipates, intends, believes, estimates and variations of such words and similar expressions are intended to identify such forward-looking statements. All these statements are subject to risks and uncertainties that could cause actual results to differ materially.

Please refer to the press release issued yesterday for a description of factors that could cause actual results to differ materially from those forecast. Any forward-looking statements made on today's call are based on information and management's expectations as of the date hereof. Future results may differ materially from our current expectations.

For more information regarding other potential risks and uncertainties, please see the risk factors section of the Company's Form 10-K for the fiscal year ended September 30, 2010. LRAD Corporation disclaims any intent or obligation to update those forward-looking statements, except as otherwise specifically stated. We'll now turn the call over to Kathy for the fiscal 1 recap. Kathy.

Thank you, Robert. Good afternoon, everyone, and thanks for joining the call today. The fiscal results this quarter were not quite what we expected due more to timing than performance. We announced a large foreign government contract back in September that we expected to ship in each of the first two quarters, but we will end up recording the entire $12 million order in the second quarter.

Our net revenues for the first fiscal quarter ended December 31, 2010 were $2.2 million, a decrease of $3 million from $5.2 million in the first fiscal quarter ended December 31, 2009. Our back order as of December 31, 2010 was $12.8 million which is deliverable in the second fiscal quarter.

Gross profit for the first quarter was $1 million or 45% of net revenues compared to $3 million or 58% of net revenues for the same quarter in the prior year driven primarily from the decreased revenue in the quarter.

Operating expenses for the first fiscal quarter decreased by $251,000 or 15% to $1.4 million from $1.7 million for the same quarter in the prior fiscal year. The decrease was primarily attributable to a decrease in sales commission based on lower third-party commissionable sales and lower product development costs as a result of some additional testing and certifications that were performed in the first quarter of the prior year.

Net loss from continuing operations for the first fiscal quarter was $437,000 or $0.01 per share compared to net income of $1.9 million or $0.06 per diluted share in the prior year first quarter, a decrease of $2.3 million.

The net income in the first quarter of last year included a $597,000 unrealized gain on derivative revaluation related to warrants which no longer applies in the current fiscal year. The increase in net loss also resulted from the lower revenues partially offset by lower operating expenses and lower tax provisions.

On the balance sheet cash and cash equivalents decreased by $1.8 million to $3.6 million due primarily to the reclassification of $3 million of cash and cash equivalents to restricted cash from amounts pledged to secure bank guarantees related to our large foreign government contracts. Without this reporting reclassification our cash and cash equivalents would have increased by $1.2 million. Even with the restricted cash requirement we have adequate cash to support our operations.

Net inventory increased by $3 million during the quarter as we acquired and built inventory to meet our current back orders. Our trade and receivables decreased by $2.4 million as we reduced the large receivable on our balance sheet at the end of the year due to heavy fourth-quarter sales in 2010.

Our accounts payable balance increased by $1.3 million during the first fiscal quarter as a result of the inventory we purchased to fulfill our back orders. The increase of $792,000 in accrued liabilities is primarily due to a $1.8 million prepayment on our large foreign contract offset by the payment of bonuses in the first quarter for achieving our 2010 profit goals. At December 31, 2010 we had working capital of $9.1 million compared to $9.8 million at September 30, 2010. And with that I'll turn it back to Robert.

Thank you, Kathy. We'll now turn the call over to Tom for a brief management presentation.

Thank you, Robert, and thank you all for joining our call. First I have to say that we were disappointed that we were not able to recognize revenue in the first quarter on our foreign government contract. We received 15% down payment or $1.8 million on the order and recognized that in the first quarter and contractually we are required to deliver the total amount of the contract by March 31, 2011. We see no issues at this time.

This would have given us our best quarter in Company history. However, as we have stated many times, our quarterly performance will be uneven since we are primarily dealing with government entities, budgets and bureaucracy. We managed our expenses and minimized our reported loss to $0.01 on $2.2 million of revenue and generated over $1 million of positive cash flow from operations.

We are anticipating a strong second quarter and first half. Operationally we introduced two new products, the 1000Xi and the 300Xi, and have received orders for these products that will be shipped this quarter. We have also introduced a wireless version of our 100X product and we have more WiFi products in development as well as some other product enhancements.

Business opportunities remain strong. We are responding to a number of RFIs and recently collaborated with a number of large integrators on each of their proposals for a large long-term RFP with the US government, which hopefully one of them will win and our product offerings will be included.

One area of concern has been US Congress's failure to approve a defense budget for 2011. We have pent up demand for our product, but funding is being held up until the military appropriations bill is approved. In spite of this we are growing in other areas and, as I stated, expect a strong first half and record performance for the fiscal year. Nothing has changed. Questions?

Thank you, Tom. We'll now open the conference call to questions from management. We encourage callers with questions to queue up with the operator as soon as possible so that there will be minimal lag time between each caller. Operator, please instruct the callers how to queue up with their questions.

(Operator Instructions).

While we are waiting, operator, we have had some questions come in over our e-mail; I'll have one of those that we can answer while we're waiting for the first caller to queue in.

This question says, in the last conference call Tom mentioned that you received your first harbor patrol order for LRAD products for the Port of Corpus Christi. Were these RX's or standard 1000X's? How many units did they purchase for each location? Approximately how many other harbors in the US might be candidates for this system?

At this point it was an LRAD-RX that was installed at Corpus Christi. That is our fully integrated device that has our proprietary pan and tilt on them. And it's one that we are continuing to offer out there for ports all over the world. We have had other port installations -- there's one in Qatar, we've installed a couple of RX's and expect other RX's to go into there.

As departments of Homeland security grant money flows to US ports we expect to work with other defense integrators and make LRAD a part of their security systems as an ability to hale and warn ships that are not responding to radio calls when they're coming into port. Operator, do you have a caller ready?

Yes, sir. Orin Hirschman.

Hi, how are you?

Hi, Orin.

I just want to go over one question and then one follow-up. You had mentioned $1.8 million was booked in Q1 on the large order?

$1.8 million of cash (multiple speakers).

Oh, cash. Okay, fine.

We didn't book --

(multiple speakers) prepayment.

-- it was a prepayment on the overall contract. We didn't book any revenue, we booked the --.

And that went into restricted cash I assume?

That went into -- well it went into cash, but we do have an accrued liability to offset that as deferred revenue.

Okay. And I guess can you comment at all in terms of the overall business -- size of that large contract? Because I've got to believe it fell short of goals or expectations earlier. You probably stated it, if I'm not mistaken, but just what's going on with the rest of the business away from that one large contract?

Well, the rest of the business is still -- it's growing and it's still strong. One issue, Orin, that I did mention is we are waiting on the US Congress to pass some form of 2011 budget. I think if you listened to Secretary Gates last week, he's running two wars without a budget.

So we have some pent up demand with the military and unfortunately the funding isn't there. So that's delayed some orders, but we're hopeful that once the budget is approved in the timetable right now at the beginning of March, that that should open up some orders for us with the military.

The rest of the business is actually growing. We're growing business in the wildlife preservation area. As Robert just mentioned, port security is -- we made our first sale into a US port, we also have some Middle East ports that we've sold into.

The foreign government order is not a disappointment, it's a matter of we were initially looking at partial deliveries, partial shipments, but we agreed with the customer that we would do a complete -- it's not going to be a one-time shipment because the volume is very large to fit on a plane. But it will be a one-time package that we'll be sending this quarter.

So our business -- on an overall basis we feel very good about our business. And as I said, we anticipate record performance for the fiscal year and a very, very strong first half. So we feel good about things. Our balance sheet is strong and we just keep plugging along.

Can you just go back, if I may, you mentioned that it will be shipped in this quarter. Didn't you indicate in the press release that part of it was shipped already?

No, we indicated that we were -- we have shipped off our dock and it's waiting. But as I said, we went from shipping partials to a completed shipment. So we were hoping -- we've done this in the past -- we were hoping to ship some partials, but the customer felt it would be easier if we could ship everything in one package under one weigh bill and make the receipt of the order much easier.

Okay. You're feeling confident that's going to ship this quarter, right?

At this point, yes.

A question just in terms of the restricted cash and the payment method and the timing of receiving payment, because obviously that's critical to your cash balances and your liquidity. Can you just go over that quickly? Again, specifically geared at this one order.

Sure, there are three different components of it. The terms of them are -- will vary based on delivery, two of them [aren't] current, which should be -- $1.8 million of it should be this fiscal year, another $600,000 in first quarter of 2012, and then the balance pertains to the warranty piece, which will carry us through probably the middle of next year.

I'm sorry, can you just repeat that again, just the cash inflows per se again? I apologize.

So it will basically release the restriction on the cash. The cash is just sitting in a bank account but it's restricted.

Right.

Should have $1.8 million that should be released by the end of this fiscal year, another $600,000 in the first quarter of next fiscal year, and then the remaining $600,000 will be probably by the middle of next year.

Okay. And just in terms of the overall payment on the order?

The order should be paid --.

It should be on a (inaudible). So once we ship and they've inspected it should be paid within --.

And that's the balance of all the money?

Yes -- for the product portion. The contract was a two part contract; the first piece is the product which will ship this year is $12 million, and the remaining piece, $5.5 million is our maintenance contract over a seven-year period, so that will come later.

So am I doing correct math if I just take the $12 million and just pull out the restricted cash, that that's the balance that's going to be paid off of the LC?

No, the restricted cash hasn't been paid by the customer, that's our bank balance that we're transferring to secure. It's basically performance of the contract to ensure that we'll comply with the requirements of the contract. And also for the prepayment amount.

So we've received $1.8 million, 15% of the contract to this point in first quarter. And the balance will be received, the remaining 85% of the $12 million will be received upon shipment and acceptance by the customer. There's not a qualifying acceptance, it's just a matter of inspecting to confirm that they've received (multiple speakers).

Do we have any idea on that timeframe? Is that a quarter, intraquarter event in this current quarter?

Depending on the timing of when we ship in Q2, it will be more likely Q3.

Meaning when you actually receive the cash?

Correct. Either very late in Q2 or Q3, the timing tends to always take longer than we hope. But probably more likely Q3.

Okay. And again, since (inaudible) questions, are there any payment issues with this customer whatsoever or it's an LC and you're feeling confident?

LC is the guarantee, that they'll pay.

This is --.

We just have to deliver the unit.

Yes, this is an extremely large reputable government that we're dealing with.

Okay. And just in terms of your overall liquidity until that payment comes in perhaps in Q3?

We're fine. We've paid most of the inventory at this point except what's still remaining in AP. So most of the inventory for this, which is our biggest cash flow requirement at this point, has been covered. So we're fine on cash in the meantime.

Okay, fine. Okay and --.

And other than this adjustment for the restricted cash we're still generating cash, operating cash in the quarter. So we should be fine.

Actually just one additional clarification, just in terms of the overall budget release that you've mentioned, has that been delaying -- I assume it's been delaying Navy contracts as well, correct, there's no difference?

It's been delaying Navy orders and also, more importantly, some Army orders that we've been working. So yes, there's been -- that has caused some delays. But like I said, we're anticipating early March -- at least that's what Congress has said that they were going to approve the budget and hopefully we'll start seeing some orders come in. We're starting to see -- we've got a couple of orders -- small orders that we're fulfilling right now, but we have a couple of good-sized orders that we're waiting on.

Okay, thanks a lot.

Thank you. Next question, please, operator.

Michael Alexander.

(Inaudible). Can you hear me? A couple questions for you. So first, I think on the last call you guys had basically said that exclusive of that $12 million order that you thought that you would beat last year's numbers, which implies about $30 million for the year. Are you still standing by that prediction?

We're still working towards that, that's -- our goal was to try to beat last year's numbers exclusive of the $12 million and we're still working towards that.

Are you less certain of it now? It seems like your language is a little bit different?

I wouldn't say that we're less certain. We still very positive about that. At this point in time, like I said, we have responded to a number of large RFI's and RFP's and it's a matter of timing, everything is a matter of timing. But right now we see a bigger market for our product today than we saw a year ago. So we feel good about things.

Okay. And the big order that I think we talked about last time was a $100 million order that was hanging out there. Is that still an RFI or has that moved to RFP?

No, it's still an RFI, we responded to the RFI and the government will take their time. But we are anticipating that we should see something, as we said the last time over the summer and then something will kick in for the 2012 budget. So, everything from what we've heard and what we responded to is still on track and we'll just wait for the government to make their decisions.

Okay. The next one was a question about inventory. So the order that you have in transit right now, is that still sitting as inventory on your books, I assume, until it's actually received by the customer?

That's right.

And you would capitalize any labor that goes into that order as well, correct?

That's correct.

Okay. So just -- it looks to me, correct me if I'm wrong here, that implies that you have a pretty substantial margin on that order because I'm looking at end of quarter you guys had $2.5 million in finished goods, that order was for $7 million, it implies margins had to be in the 65% plus range. Is that right or am I missing something?

The margin on the product is fairly good. We also will have some offsetting commissions and other expenses associated with it.

We have some --.

So the operating margin should be fairly comparable or probably comparable or maybe a little bit less than what our normal would be because of the high volume.

We have some turning requirements and we also have some additional warranty requirements for this contract. So the margins will still be healthy, but they're going to be -- they'll be whittled down a little bit by some other costs that we need to incur to set up some training facilities so that we can meet the rest of the term of the contract, which is a seven-year maintenance agreement.

And also there is a commission associated with it that will offset it.

Right. So a lot of these are going to show up then probably in SG&A rather than in gross margin, is that correct?

Yes, some portion of that will.

Okay, that makes sense. The last question was I wanted to ask you about your R&D spend. It was actually down a little bit this quarter I guess for a variety of reasons if you read the Q. Can you guys talk about exactly where your R&D spend is going right now, what kinds of things you're working on?

Well, we're working on -- we're working on a couple of product enhancements and, as I indicated, we just released our first wireless product. We have been working on some -- there's some wireless capability out in the marketplace, but most of it is not so robust. But we've come up with a product that we feel very confident will be successful for us.

So we've been working on wireless. We have a number of other projects that we're working on. So the R&D hasn't been cut back. What had occurred in the prior year is we did a number of tests; we brought our product up to mill spec and we incurred a lot of outside test costs to achieve that. So that -- now that the product has been tested and has been certified as meeting mill standards, we didn't have to incur those costs.

But our R&D is -- we're still spending, we've just added another software person because we see this product morphing into more of an integrated package and we've added some software capability so that we can achieve that. We have an RFI that we're responding to next week that calls for an integrated package, a package that would include not only our product but a number of other pieces, a number of other sensors and it's a major, major program and we feel confident that we have a good offering.

Okay. And in that regard I think you had said that your R&D expenses are probably going to be comparable to what they've been historically going forward. Does that mean since you're dropping these other expenses you're going to be ramping up R&D in other areas?

No, I think in total year over year our R&D costs should be comparable. So we are ramping up in some areas, but we're not going to see a major increase in cost.

Where our costs tend to fluctuate is more from what's done internally versus outside. Where we've used outside certification, test environments, there's higher outside costs associated with that. Whereas a lot of our development is done internally with our inside engineers and those costs are fairly stable. So (multiple speakers) that we do need to use outside services it may pump a little bit, but it keeps us -- we should be pretty flat year over year.

Okay. And is it -- is your direction primary being driven by the US military and what their requirements are?

No, a lot of our requirements are US military driven, but it's also other customers. We're doing a lot of -- we're doing some R&D work right now for a customer that is non military, they're into wild like mitigation area and we're working with them on a new product offering. So, we're working with the customer and trying to make the customer requirements.

That sounds good. Thank you very much.

Thank you, Michael. Operator, next question, please.

[Frank Coker].

Hello. Do you hear me?

Yes, we can.

Okay, my question is I know you shipped it to -- they said it was immediately to Afghanistan. And I'm supposing that it's being used militarily for the part where you can immobilize troops or whatever. And I'm wondering if we're going to run into very many ramifications or hold backs until this would be (multiple speakers). Pardon?

No, go ahead.

As far as using it as a weapon or anything, if somebody else would get a hold of it, our enemies or something, what would happen and maybe the government would stop the sale to anybody else. Is there anything like that in the wind?

No, Frank. Basically we're not a weapon, we're a communication device. And actually the utilization of the product in Afghanistan is mainly to hale and warn and communicate to the innocent civilians and keep them out of harm's way.

I got you.

So basically our device is not a weapon, it's something that can save lives on both sides of the device. So we are selling into -- we've been selling this product for six years, we've sold into various governments. And we do get -- on some of the media we get called the sonic cannon or a sonic weapon, but we are just a communication device, so we're not going to harm anyone.

Okay, that was one of my concerns. And I'm watching it close. Okay. Thank you, you satisfied me.

Thank you. Next question please, Operator.

[Dan Nicholas].

Hi, thanks for taking my call. I was just wondering -- I know it's a small number, but I was just wondering about the $77,000 bad debt increase for the quarter.

So the bad debt increase -- we had one customer that had been slow on payment, and so as a precautionary measure we put a reserve against that receivable that was about $56,000. And then in comparison to prior years, we had actually a recovery last year, so that was the balance. The recovery last year showed a favorable bad debt compared to the increase in expense this year. So the total is the $70,000. But it's still potentially correctable, we're still working with it, we're just being prudent on a financial standpoint to reserve for it.

Got it, okay, thank you.

Thank you. Next question please, Operator.

There are no more questions in queue at this time, sir.

We'll take some other questions that have come in on the e-mail. Please update the progress on the shipboard protection Block 0 and Block 2. What is the difference between the two? Is Block 0 for manual 1000X's and Block 2 for Rx's? What have you shipped so far against each Block and what is left to ship?

Okay, so, let me see if I can get that whole question, Robert. In terms of Block 0 -- Block 0 is an RFP that we won back in 2007 and it was indefinite in quantity. And the total, we've shipped a number of units against that RFP and we're still looking to ship a number of units. It's for our manual 1000X.

And the Navy has recently come out with a new RFI, which is normal because the 2007 contract is a five-year term and that will expire in 2012. So it's not uncommon for them to come out with an RFI more than a year in advance, especially the Navy; they're a little longer term than the Army. And basically we're responding to that RFI, we have until tomorrow to respond. And we're very positive because most of the specs in that RFI -- our product meets those specs and the Navy has been very pleased with our product.

The Block 2 was for LRAD-RX, that also is a five-year program, it's for 66 pieces and we just were awarded that contract this past summer so we have five years left. So the RFI is more or less a replacement to the original Block 0 RFP. So again, timing on that should be 2012. We anticipate some additional orders between now and then from the Navy. And I think I answered the question.

Yes, thank you. Another question that has been e-mailed in. Please update the progress on the CROWS application with Kongsberg. Where are we at on that one?

Well, we're still working that. We're still -- we've partnered with Kongsberg, our 300X has been included in their Protector package. If you go on their website you'll see their brochure that they've put out for the Protector and we are doing a joint trade show with them next month. So it's still in process and, like we've been saying all along, these contracts take a long time to develop and we're still working and everything is looking positive.

Another question that came in -- one of the new products being discussed is a system of -- several LRAD's to project 360 degrees. Could you add some insight into where you see this product being used? Is there a customer that would be using it? I think this may be referring to using LRAD in place of our old SoundSabre systems and using it to do mass notification and parameter security and that is an area that we are working on.

So we are responding to an RFI for mass notification based -- Army-based mass notification systems and we are developing a new product to meet that specific requirement. And in addition, we are also working on some other products for bird mitigation, something that is more omnidirectional than very directional because we want to cover more ground, customer request.

So we're working on a couple of different R&D projects in that space. And they're a little too premature to discuss, but they're ongoing and -- we have the timetable of trying to complete them within the third quarter.

Thanks, Tom. Operator, do we have any more questions?

Yes, sir. [Jonathan Manela].

Hey, guys, I was going to ask about Kongsberg, but you just answered it.

All right, Jonathan.

Still in process, Jonathan.

Thank you. Any more questions, Operator?

No, sir, there are no questions in queue at this time.

We'll go ahead and conclude the conference call. We thank you for listening to and participating in LRAD Corporation's fiscal Q1 2011 call. A replay of this webcast will be available in approximately 24 hours through the same link that we issued in our January 27 press release. Thank you.